Greg Mankiw’s stochastic mumbo jumbo on rising inequality

Harvard economist and George Bush advisor Greg Mankiw is having problems with explaining the rising inequality we have seen for the last 30 years in both the US and elsewhere in Western societies. He writes:

Even if the income gains are in the top 1 percent, why does that imply that the right story is not about education?

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If indeed a year of schooling guaranteed you precisely a 10 percent increase in earnings, then there is no way increasing education by a few years could move you from the middle class to the top 1 percent.

But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

To me this is nothing but really one big evasive attempt at trying to explain away a very disturbing structural shift that has taken place in our societies. And change that has very little to do with stochastic returns to education. Those were in place also 30 or 40 years ago. At that time they meant that perhaps a CEO earned 10-12 times what “ordinary” people earns. Today it means that they perhaps earn 100-200 times what “ordinary” people earns.

A question of education? No way! It is a question of income and wealth increasingly being concentrated in the hands of a very small and privileged elite, greed and a lost sense of a common project of building a sustainable society.

“It is a question of income and wealth increasingly being concentrated in the hands of a very small and privileged elite, greed and a lost sense of a common project of building a sustainable society.”

Is greed the economic explanation for the increasing inequality in capitalism? Of course the elite is greedy and they want more and more, but what is he mechanism behind their success in achieving their aim? The neoclassical economists can not explain this, but do you have an explanation other than “greed”?

Of course you may have a look at what Karl Marx wrote in Das Kapital 150 years ago. On one level that may give you a good picture and explanation of processes that create inequalities in a market economy. On another level, however, it doesn’t give you very much, since I think explanations of this kind of processes have to be both historically and socially posited. So I think that you have to look for things like ideological turns from e. g. “keynesianism” towards market fundamentalism, neoliberalism, deregulations etc if you want to come up with not too abstract and general explanations in terms of class struggle and exploitation. Not that these kind of explanations are necessarily wrong, but you have to be able to present a cogent “story” and empirical facts that will warrant your hypothesis even to those who are not Marxists. If not, you will only convince those who already share your on basic “Weltanschaung”, I’m afraid.

A really good historical example as to how Mankiw has completely ignored the more complex realities is the British situation post the Napoleonic Wars. Land rents, and the skyrocketing costs of grain had induced many of the landed gentry to sell to commercial farmers to cover their profligate spending, and the bankers had issued loans to cover these purchases. When grain prices dropped, the landed gentry, who were well represented in government, introduced the Corn Laws to protect their mutual interests with the bankers and avoid the collapse of real estate loans for farming.

As the eminent British historian Eric Hobsbawm wrote, “The Corn Laws which the farming industry imposed on the country in 1815 were not designed to save a tottering sector of the economy, but rather to preserve the abnormally high profits of the Napoleonic war-years, and to safeguard farmers from the consequences of their wartime euphoria, when farms had changed hands at the fanciest prices, loans and mortgages had been accepted on impossible terms. [Eric Hobsbawm, Industry and Empire: The Birth of the Industrial Revolution (1999), p. 175.]

The Reform Act of 1832 gave the vote to a large portion of the industrial middle class, (the job creators of the time) who wished to repeal the Corn Laws as the high cost of dietary staples like bread was driving up the wage demands of their labor. Having a sufficient power base enabled them to finally force free trade in grain, allowing in exports, in 1846. This also allowed the exporting countries to purchase more British goods as the Industrial Revolution progressed. We should also note the Scottish landlord’s economic approach of shipping your loyal tenants off to the colonies to make available the land for more profitable sheep raising.

This is only a thumbnail sketch, but we can find a similar pattern in current day US events, where a rent-seeking class led by Romney seeks to restrict expenditures on infrastructure, research and innovation that would most likely be lead not by a bunch of private equity spread sheet jockeys, but by scientific and technological entrepreneurs, whose motivation goes beyond simply getting richer than his fellow man. In the words of Keynes in his discussion of long term expectations (p150 of General Theory in my well thumbed paperback): “If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment as a result of cold calculation”

The story of the industrial revolution is also one of many technologically innovative workers who achieved success because of the opportunities that were available to them, with little education beyond that which they learned from practicing their craft. A prime example is Maudslay, inventor of the screw cutting lathe and founder of machine tool/mass production technology. The Wikipedia piece on him is quite good. http://en.wikipedia.org/wiki/Maudslay While the requirement for education is greater in a more complex society, equal opportunity and access to education is even more important.

It appears to me that it’s not simply rich vs. poor, but a three party struggle: rentiers vs. innovators, both of whom have more political power than the working person upon whom they depend to provide their labor and consume their produce.